The SARB cut the repo rate for the first time in four years yesterday and signalled a more optimistic outlook for inflation. The 25bp cut rate was, by and large, expected, but the overall tone of accompanying forward guidance was a bit more cautious than expected. Although the decision was unanimous, the SARB revealed that the monetary policy committee considered an unchanged decision, a 25bp cut, and a 50bp cut. The SARB does not believe it is behind the curve when it comes to interest rates, so a more measured approach is expected for this easing cycle.
What was particularly interesting was an upward revision in the SARB’s Quarterly Projection Model (QPM) forecast for the end-of-year repo rate from 7.65% to 7.86%, even though inflation forecasts were revised lower. Further out, the central bank’s forecast sees the repo rate moving towards and stabilising slightly above 7.0% in 2025, suggesting a further 100bp worth of cuts to come.
Looking at the professional market, the SARB’s less-dovish-than-expected stance caught investors off-guard to some degree. FRAs and interest rate swaps have been paid higher after the statement. FRAs continue to fully price in another 25bp cut in November, as well as an additional quarter-point cut in January. Aligned with the SARB’s QPM model, the market is positioning for four more 25bp cuts in the cycle.
With the US Federal Reserve starting its rate-cutting cycle with a 50bp reduction earlier this week, the interest rate differential has widened despite the SARB cut. Local optimism, continued Fed cuts, and a cautious SARB, are positives for the ZAR. The SARB is not pre-emptive in its monetary policy outlook and, thus, is likely to remain cautious even with the domestic CPI forecast expected to move closer to the lower end of the inflation targeting range.